Introduction to Proof-of-Work and Proof-of-Stake 3.0. Part 3

Because both Bitcoin and Ethereum use proof-of-work, PoS has not been as popular as PoW, even though it solves many of the problems that currently exist with proof-of-work.

The first coin to implement proof-of-stake has been PeerCoin. PeerCoin started with using both proof-of-work and proof-of-stake. Another coin that started using both PoW and PoS has been NovaCoin. BlackCoin was the first to use PoS exclusively, without combining it with PoW.

The differences between PoS and PoW

Proof-of-stake is different from proof-of-work in that miners in a PoS system instead of having to perform mathematical calculations have to prove that they have access to a certain number of funds on the cryptocurrency network. Generating a block on such a decentralized network often includes sending funds to oneself, which serves as a proof of the ownership of a stake in the cryptocurrency, hence the name of the algorithm. The amount of coins that a network may require changes just like the difficulty of the Bitcoin network changes so that the network generates blocks of the blockchain on a regular basis, in approximately the same blocks of time.

The approach of proof-of-stake algorithms to the generation of the blocks on cryptocurrency networks completely solves the issue of wasted energy. However, the algorithms also raise questions about their security, which developers of BlackCoin and Qtum believe to have solved.

The goals of PoW and PoS

The entire purpose of having miners do the work, be it via a proof-of-work or a proof-of-stake algorithm is to avoid attacks on a network.

For a transaction to be valid on most cryptocurrency networks, the transaction needs to collect a certain number of confirmations from the network. While the requirements for a confirmation may differ slightly from network to network, a confirmation often equals to an inclusion in a block of a blockchain. For example, if a website requires six confirmations on the Bitcoin blockchain, this means that it wants to see a transaction included in six blocks of the Bitcoin blockchain. The transaction itself will be included in one block and the next five blocks will have the information about the transaction via hashes of the previous blocks.

On a network that has implemented PoS, a user first needs to have access to at least some of the existing coins, and only then can the user participate in the creation of the blocks on the blockchain and possibly creation of the new coins. This means that the more people use the network and have coins, the more secure the network and the higher the competition for block creation.

Coin Age on proof-of-stake networks

To distinguish between users who have just obtained their coins and users who have been holding their coins for a period of time, proof-of-stake algorithms use the idea of coin age. The essence of the idea is that the longer a user holds the coins, the higher the changes of winning the right to create a block of the network blockchain and get a reward for doing so. The original intention behind this idea was to give an incentive to early coin holders and buyers to stay online longer. However, as it later turned out, this intention didn’t always work as planned because many of the long-term coin holders would still stay offline, hoping that if enough of other long-term holders stay offline, then the reward for the creation of a block would increase and they would be able to get bigger benefits when they go online. Also, the approach of giving most voting power to those who have been holding the coins for the longest period of time has a flaw in that such holders can go offline for long periods of time and then get control over a decentralized network by suddenly connecting back to it and having over 50% of voting power because of the size of their holdings.

For this reason, in current implementations of PoS algorithms, time calculations encourage connectivity and penalize going offline.

Another issue with coin age is that if there are only a few nodes online on a PoS network, it may become relatively easy to gain control over consensus on the network. In addition to this, attackers can even calculate the probability of winning the reward to create a block of the blockchain based on who has how many coins.